What’s This Costing Me? A Guide to Inventory Valuation in Your School Nutrition Program
We’re nearing the conclusion of our blog series on inventory management for your school nutrition program, but we’re not quite done yet! We still have 2 more weeks of informative posts with helpful tips to enhance your school nutrition operation and make sure your leadership is helping it reach the highest of heights!
So far in our inventory management blog series, we’ve covered topics such as:
This week, we’re diving into an issue that should be very important to your child nutrition operation… MONEY! More specifically, how to properly value the inventory that you have both at sites and warehouse locations.
The 3 main inventory valuation methods that are most commonly used in school nutrition operations are detailed in the remainder of this article. As you will read, each valuation methods has its own unique purpose and value.
Valuation Method #1: FIFO
Ah, good ol’ FIFO! Chances are you are using this method in some parts, if not all, of your district’s nutrition program. FIFO stands for First-In, First-Out, meaning that the stock items that arrive and are received into the inventory system first are the first to exit the system.
For example, a case of whole grain bread that arrived on Tuesday, the 17th, should be used before a case of whole grain bread that arrived on the following Monday, the 23rd. By utilizing FIFO, it ensures that you are cycling out your oldest items and keeping your inventory as new and fresh as possible.
FIFO is the best inventory valuation method to use for the food service industry for several very good reasons. You end up with less money wasted, because less food spoils. You use the oldest products before they get to their expiration date, ensuring that your inventory is constantly turning. Additionally, you end up with less product on the shelves in general, because as you’re using the older product, you’re only ordering what you know you will be able to turnover in a timely manner. Less product on the shelves at school sites means more money available for you to spend on other things your school nutrition operation needs.
Valuation Method #2: LIFO
Hmmm. After reading about FIFO in your school nutrition program, I bet you can guess what LIFO means. If you said Last-In, First-Out, GOLD STAR FOR YOU! An operation that uses LIFO ensures that the most recent items that enter the inventory system are the first to leave it.
As you can probably already surmise, LIFO is not a very practical inventory valuation method to be used in a school nutrition program, or really any food service operation in general. Items that are at the back of your shelves would just keep having things stacked in front of them, and those back row items would never get used, thereby wasting your money when those products spoil.
Having a tough time visualizing where LIFO makes sense as an inventory valuation method within a business operation? Think SAND, and lots of it. A sand pile starts out small, with just a little sand. But as more and more sand gets dumped on top of the original sand, the pile grows in size. When trucks come to pick up the sand from the pile, they typically pick from the top or close to the top of the pile. The truck uses the sand that was most recently added to the pile, nearest the top. The original sand at the bottom of the pile won’t get to see the light of day again until all the other newer sand additions are picked up by other sand trucks.
LIFO is best used in a situation where you have non-perishable items, and the timed exit of items from your inventory system doesn’t matter as much as in a perishable item situation.
Valuation Method #3: Moving Average Cost
Moving Average Cost is the third and final most common inventory valuation method used in school nutrition programs. Predictably, it is essentially a compromise of the cost of FIFO and LIFO.
Moving Average Cost recalculates an item’s cost at each receipt by averaging the actual cost of the new receipt with the cost of the identical items that are currently in inventory. Keep in mind that product that has already been used does not factor into the Moving Average Cost calculation. It only cares about what items you currently have in your inventory and the price points they were received at.
Moving Average Cost is a great valuation method for tracking your perpetual inventory, and keeping it true. However, with all the calculations that must be run in this style of inventory valuation, Moving Average Cost should only be used if your district has school nutrition software that tracks perpetual inventory. Which type of inventory valuation method does your district’s school nutrition program use? Is it one of the three I’ve listed, or do you have your own hybrid system that works for you? Let me know in the comment section below!
Next week we’ll wrap up our blog series on inventory management in school nutrition programs with an article on the best practices to use when tracking USDA Foods items as they move through your inventory system. Hope you come back next week!